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Business Law and Practice – Distribution of Assets on Insolvency
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Complete summary of the BLP topic on dealing with assets in the event of corporate insolvency. BLP grade: 93%
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Preserving and Increasing the company’s assetsLiquidators/administrators have powers to investigate, and sometimes to set aside certain transactions
Aim is to challenge any transactions that are voidable and return assets or cash to the company
for the benefit of the creditors
Examples of transactions that may cause concern:
Company repays a bank overdraft that was guaranteed by the company directors – directors
preferred this creditor to avoid becoming personally liable, thereby reducing the amount of
money left in the company to distribute to other unsecured creditors
Company grants a floating charge in favour of A at a time when there was £10,000 outstanding
on a loan entered previously – A is now a secured creditor and will rank ahead of unsecured
creditors (I.e. A is in a better position on liquidation than it would otherwise have been)
Company sold stock worth £40,000 to wife of director for £15,000 in order to improve cash flow
– assets were sold for £25,000 less than their worth, reducing the remaining assets by £25,000
to the disadvantage of company’s creditors
Steps to take:
(1) Is a challenge required and, if so, by whom?
I.e. is it necessary for challenge to be brought, or does it happen automatically?
(2) Identify any suspicious transactions
Some transactions can be breaches of more than one provision
(3) Identify which provision is relevant and set out definition – is it satisfied?
(4) Identify who can challenge and whether it’s within the relevant time
(5) Show company insolvency
(6) Other requirements & defence?
Effect of a connected person?
(7) What is the likely outcome?
N.B. always check that any securities given have been registered (s.859 CA) - if not, the security is void
“connected” (s.249), “associate” (s.435)
Transactions at WHO? - liquidator or administrator (not creditors ORDERS – transaction will
an undervalue generally) (s.238(1) and (2) IA 1986) be voidable at the
Need to make court application discretion of the court
(s.238) (s.241 IA 1986):
UNDERVALUE? (s.238(4) IA 1986): Returning property
A gift (no consideration) (s.238(4)(a)); or to the company
o Re MC Bacon – debenture wasn’t (s.241(1)(a))
gift and wasn’t made without Returning proceeds
consideration, as bank provided of sale to the
consideration by not calling in its company (s.241(1)
overdraft and by providing fresh (b))
advances to company Discharge of any
A transaction where the company received security (s.241(1)(c))
, consideration (in money or money’s worth) Require any person
significantly lower in value than it provided to pay, in respect of
(s.238(4)(b)) benefits received by
o e.g. company sells office furniture to him from the
wife of a director for £500, who then company, such sums
sells it to a hotel chain for £5,000 – to the office-holder
company didn’t receive what it as the court may
should for its assets, and director’s direct (s.241(1)(d))
wife has benefited to detriment of Make a surety or
general body of creditors guarantor whose
Re MC Bacon – granting security isn’t a obligations to any
transaction at an undervalue since the mere person were
creation of a security didn’t deplete the released or
company’s assets and thus company didn’t discharged under
provide a consideration measured in money the voidable
or money’s worth transaction be under
a new obligation
RELEVANT TIME – where transaction was with a
connected person, transaction must occur within the
‘relevant time’ (2 years ending with the onset of
insolvency (s.240(1)(a) IA 1986))
Onset of insolvency varies depending on the
procedure involved (s.240(3)(e) IA 1986)):
o CL – date of presentation of petition
o CVL – date it formally enters into
liquidation
o Administration – date when
company files a Notice of Intention
to Appoint and Administrator, or
date when it actually goes into
administration (whichever is the
earlier)
STATE OF COMPANY – when transaction was
entered into, company must have been insolvent at
the time or become insolvent as a result (s.240(2) IA
1986) - consider balance sheet and cash flow
insolvency
Where transaction is with a connected
person (ss.249 and 435), insolvency is
presumed and can be rebutted
Otherwise, liquidator/administrator must
produce evidence of insolvency at the time
or as a result, by referring to balance
sheets, correspondence, court proceedings,
etc.
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